Successor Liability in Export and ItT tiImport Transactions · I&E LImport & Export Law • Whee successo ta es on successor takes on burdens of a previous unrelated entity through

Successor Liability in Export and I t T tiImport Transactions

April 26, 2012

Presented byMargaret M. Gatti, Esq.

www.morganlewis.com

Louis K. Rothberg, Esq.

Ground RulesGround Rules

N Ch• No Charge

• Electronic submission of questions• Electronic submission of questions

• Slides Available on Morgan Lewis Web Siteg

© Morgan, Lewis & Bockius LLP 2

DisclaimerDisclaimer

I f ti l• Information only

• NOT legal advice!• NOT legal advice!

• Accurate as of date of WebinarAccurate as of date of Webinar


Successor Liability Under US I & E LImport & Export Law

• When successor takes on e successo ta es oburdens of a previous unrelated entity through merger, acquisition, or divestiture [MAD]divestiture [MAD].

• Successor liability allows a governmental agency or creditor to pursue ppurchaser even when the purchaser did not expressly assume such liabilities as part of the purchase orpart of the purchase or participate in illegal activity.


Successor LiabilitySuccessor Liability

• NO Company should inadvertently “inherit” civil, administrative or criminal responsibilities for any illegal activities for which it lacks thorough understanding

• Process of ascertaining potential exposure for successor liability is referred to as Due Diligencey g

• We will discuss Due Diligence later in this Webinar


Law of Successor Liability Under US I & E LUS Import & Export Law

L l t f d i i f A d i i t ti• Largely a creature of decisions of Agency administrative tribunals or policies

• Courts & agency tribunals generally left to their own devices to fashion standards for successor liability

• Few US statutes imposing a regulatory regime expressly mention successor liability



I b f t lli US t t t l t• In absence of controlling US statutory language, courts and agency tribunals turn to State law to fashion rules for successor liability

• Leads to lack of uniformity across all federal regulatory schemes for application of identical rules for federalschemes for application of identical rules for federal regulatory successor liability



G l S Li bilit i i l d i lti t l• General Successor Liability principles derive ultimately from State law

• Large majority of federal matters adopting successor liability theories fall within:– Environmental Remediation

– Labor


How Successor Liability in Export A i BActions Began

AECA EAA IEEPA TWEA T iff A t f 1930• AECA, EAA, IEEPA, TWEA, Tariff Act of 1930, FCPA don’t specifically deal with USG enforcement via successor liabilityenforcement via successor liability

• Prior to 2002, successor liability in export transactions was not a critical issue

• Enforcement agencies generally pursued remedies/penalties against violators themselves


Example of Int’l Trade Statute A h i i S Li biliAuthorizing Successor Liability

I d Lib S ti A t [ILSA] f 1996 S ti• Iran and Libya Sanctions Act [ILSA] of 1996, Section 5(c):– The sanctions shall be imposed on any person the– The sanctions shall be imposed on any person the

President determines “is a successor entity to the person referred to in paragraph (1)


Executive Order 13590 Expressly Imposed Successor LiabilitySuccessor Liability

E O 13590 i d dditi l I S ti N 21• E.O. 13590 imposed additional Iran Sanctions Nov. 21, 2011, citing the statutory authority as IEEPA

• E O 13590 authorizes sanctions against any personE.O. 13590 authorizes sanctions against any person [including non-US] who knowingly sells, leases, or provides to Iran goods, services, technology or support , that has a certain value that could directly & significantlythat has a certain value that could directly & significantly contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources located in Iran.


Executive Order 13590 Expressly Imposed S Li bilitSuccessor Liability

E O 13590 S ti 1( ) l th i• E.O. 13590, Section 1(c) expressly authorizes imposition of sanctions for violations of E.O. 13590 against primary violators’ US and non-US g p ysuccessors

• E.O. 13590 also expressly authorizes imposition of sanctions for violations of E.O. 13590 against parents, subsidiaries and affiliates of primary violators under p ycertain circumstances



P ti t l i l t l i tl NO l• Prosecuting actual violator only is currently NO longer the case

• BIS, OFAC, DDTC, DoJ and CBP now impose successor liability for violations of the export/import & FCPA statutes and regulations they respectively enforce

• Successor liability trend started for BIS with admin caseSuccessor liability trend started for BIS with admin case Sigma-Aldrich in 2002



ALJ i d i Si Ald i h t bli h d l d k• ALJ in admin Sigma-Aldrich case established landmark export agency precedent

• Ruled BIS can pursue enforcement via successor liability under the EAR

• ALJ applied General Federal rules of construction applicable for all Federal statutes – not just exportapplicable for all Federal statutes not just export control



ALJ l k d t 1 USC S 5 [ t d i 1873] id• ALJ looked to 1 USC Sec. 5 [enacted in 1873] provides in part:– “The word ‘company’ or ‘association’ when used in– The word company or association , when used in

reference to a corporation, shall be deemed to embrace the words ‘successors and assigns’ of such company or association in like manner as if these last named wordsassociation in like manner as if these last named words… were expressed.”



ALJ l l d d t t l i i l t d• ALJ also concluded state law principles supported imposing successor liability

• ALJ found “substantial continuity” of the business of the assets purchased



Si Ald i h ALJ l d “i t” t h• Sigma-Aldrich – ALJ ruled “innocent” asset-purchaser can be penalized for EAR export violations committed by an unrelated seller before the asset sale occurred

• Respondent did not challenge this ALJ holding in US courtscourts

• Respondent agreed to settle for over $1M



• Nov 2002 BIS• Nov 2002 BIS Sigma-Aldrich press release:

• “A company will be held accountable for violations of US export control laws committed by companies that theycompanies that they acquire.”



I 2002 BIS Di t f Offi f E t E f t• In 2002, BIS Director of Office of Export Enforcement (OEE) stated:

• “An asset purchaser assumes both civil and criminal liability of the seller for the seller’s non-compliance with export regulations.”



• OEE Director also said:

• “Position of BIS and Dept. of Justice that private parties cannot contractparties cannot contract around such liability.”



BIS h h d R d t i 2002 d bt i d• BIS has charged Respondents since 2002 and obtained settlements from companies where the Respondent either:– Purchased ownership/equity interest in offending exporter

or

– Purchased assets only of offending exporter



BIS’ li bilit ti h t b t t d• BIS’s successor liability practices have not been tested in US Federal Court and either been upheld or invalidated

• Nor has Congress seen fit to stop the BIS practice with appropriate legislation

• Thus, EAR successor liability is the de facto rule in the real world of business

• E O 13590- November 2011 – expressly validatedE.O. 13590 November 2011 expressly validated principle of imposition of successor liability



Wh d li bilit l i t?• Why does successor liability rule persist?– ALJ will follow “law” in admin cases as pronounced by BIS

– Court litigation is time consuming

– Court litigation is very expensive

– Possible negative actions by regulator on needed licenses

_ Congress’ apparent acquiescence


DDTC, OFACDDTC, OFAC

W f d DDTC OFAC t d ALJ l l• We found no DDTC or OFAC reported ALJ legal opinions imposing successor liability such as BIS Sigma-Aldrich

• DDTC and OFAC actual practice IS to impose successor liability broadly

• “If BIS can do it so must we be able to”• If BIS can do it, so must we be able to


DDTCDDTC

• DDTC mandates notification from registrants of an acquisition ITAR 122.4(a)(2)DDTC i i i i t t t t t th t• DDTC requires acquiring registrant to state that it “assumes all rights, responsibilities, liability, and obligations that existed exist or mayand obligations that existed, exist, or may develop regarding licenses, agreements, or other approvals [of the acquired entity]…”pp [ q y]


Common Export ViolationsCommon Export Violations

Th f ll i tibl t i iti f S• The following are susceptible to imposition of Successor Liability: Exporting and reexporting without product specific license Exporting and reexporting without product specific license

Exporting and reexporting to prohibited country

E ti d ti t SDN D i d D b d Exporting and reexporting to SDN, Denied or Debarred Party



(C t’d)• (Cont’d): False statements/material omissions on export control

documentsdocuments

Deemed exports, e.g., foreign employees

No destination control statements No destination control statements



(C t’d)• (Cont’d): AES filings incorrect

Payment of sales commissions not reported

Failure to keep required records


Successor Liability in ImportingSuccessor Liability in Importing

P lt d i i f CBP l bli i d th BIS• Penalty decisions of CBP less publicized than BIS, DDTC

• CBP has indicated willingness to impose successor liability


Successor Liability in Import A iActions

F d l C t th t t itl ll CBP t• Federal Court case that tacitly allows CBP to pursue successor liability for unpaid import duties under the Tariff Act of 1930

• US v. Ataka America, Inc., 826 F. Supp. 495 (Ct. Int’l Trade 1993).


Common Import ViolationsCommon Import Violations

Th f ll i tibl t i iti f S• The following are susceptible to imposition of Successor Liability: Undervaluing imported merchandise Undervaluing imported merchandise

Erroneous HTSUS classification

I l i f d t f t t t Improper claim for duty free treatment

NAFTA or other FTA documentation incomplete


Successor Liability in Bankruptcy P diProceedings

B k t t’ d f l “f d l ” d• Bankruptcy court’s order of sale “free and clear” under bankruptcy code does not stop the agency assertion of successor liabilityy

• A purchaser of a bankrupt’s assets from a bankruptcy court will be held liable by agency for the bankrupt’s violationsviolations

• Following language taken from recent DDTC Settlement:





• We found no reported Federal Bankruptcy

ith h ldicase either upholding or invalidating the practice of imposingpractice of imposing successor liability for purchases made from pthe estate of a bankrupt violator


RECAPRECAP

• Neither EAA AECANeither EAA, AECA, IEEPA, Tariff Act of 1930, FCPA, nor their implementing regulations, p g gexpressly authorize successor liability

• BIS, DDTC, OFAC, DOJ d CBP li iand CBP agency policies

impose successor liability on asset or equity purchasers of/frompurchasers of/from violators


RECAPRECAP

N US C t ifi ll i lid ti th i ’• No US Court case specifically invalidating the agencies’ practices of imposing successor liability in export/import or FCPA

• No Congressional action specifically approving or invalidating the agencies’ practices of imposing successor liabilitysuccessor liability


FUTURE OF SUCCESSOR LIABILITYLIABILITY

O J 14 2011 f US Att G l M k• On June 14, 2011 former US Attorney General Mukasey testified before House subcommittee on Crime, Terrorism & Homeland Securityy

• Asked Congress to enact limits of FCPA successor liability as asserted by DoJ saying DoJ policy has gone too fartoo far

• E.O. 13590 - IEEPA portends support for very broad Agency assertions of successor liability, both g y y,domestically and extraterritorially


Successor Liability can lead to l filarge fines

I D 2008 L b b d Qi ti d t• In Dec. 2008, Luxembourg-based Qioptiq agreed to pay DDTC $25 million fine

• Settlement for ITAR violations committed by a foreignSettlement for ITAR violations committed by a foreign company acquired by Qioptiq

• ITAR violations occurred before Qioptiq purchased violator


Successor Liability can lead to l fi !large fines!

Qi ti l t d i il t t b i d• Qioptiq case related primarily to re-exports by acquired company, not by Qioptiq itself, of US-origin ITAR-controlled defense articles

• Violations by non-US persons from one foreign country to third foreign country, without DDTC re-export authorization



FCPA li bilit di d ft t l i b• FCPA successor liability discovered after post closing by eLandia acquisition of Latin Node

• Latin Node made improper payments to Honduran & Yemeni officials

• eLandia disclosed FCPA violations to DOJ



L ti N d l d d ilt t FCPA i l ti• Latin Node pleaded guilty to FCPA violations

• $2 million fine imposed to be paid by eLandia• $2 million fine imposed to be paid by eLandia


Coping with Risks of Successor Li biliLiability

H it lf th t it ill id• How can a company assure itself that it will avoid or mitigate successor liability problems before closing a MAD deal?

• Generally Perform Due Diligence Investigation of Target’s Actions


Due DiligenceDue Diligence

I MAD t ti f 3 i t• In MAD transactions, focus on 3 points:– What are risks of successor liability exposure?

– What are business benefits of deal?

– What actions should management take in light of successor liability risks and business benefit?successor liability risks and business benefit?


Opinion Procedure Release [OPR] f FCPAfor FCPA

• Opinion Procedure Release Unique to FCPA• Foreign Corrupt Practice Act Opinion Procedure,

28 CFR S 801 t28 CFR Sec. 801. et. seq.• Allows company to submit a set of facts to DOJ

to determine if DOJ would take any enforcementto determine if DOJ would take any enforcement action based on those facts

• Needs to be actual situation company is facing• Needs to be actual situation company is facing



S l OPR d l ith i f li bilit• Several OPRs deal with issues of successor liability under FCPA

• Requestors sought to obtain assurances from DOJ thatRequestors sought to obtain assurances from DOJ that they would not be held liable for their acquisition target’s pre-closing conduct



O l R t i bl t l th OPR th i• Only Requestor is able to rely on the OPR – otherwise it’s mere guidance to public

• www usdoj gov/criminal/fraud/fcpa/opinionwww.usdoj.gov/criminal/fraud/fcpa/opinion• See OPRs 2003-01; 2004-02; 2008-02 which involve

successor liability issues


Pre-MAD Due DiligencePre MAD Due Diligence

• Due Diligence means investigation of facts

d l i f tand analysis of export and import compliance by targetcompliance by target before closing MAD transaction – Mitigate risk



• Team must consist of• Team must consist of buyer’s and seller’s export, import and l d hi lleadership personnel

• Must dedicate sufficient resources and time

• Consider using export/import outsideexport/import outside legal counsel



B t h i li t f ti• Buyer must prepare comprehensive list of questions designed to identify issues

• Foreign Buyer may need export license to even access some key information in hands of target company



S ll h ld h it t/i t li “h• Seller should have its export/import compliance “house in order” before it offers to sell equity/assets

• Seller’s imperfect records of export/import compliance will compromise sales price or abort deal



O i i d i l ti d dili i ti ti• Organizing and implementing due diligence investigation approach and team membership will depend on factual scenario



P ibl MAD S i• Possible MAD Scenarios:– Acquisition of Foreign “Commercial” Company with

Foreign Person EmployeesForeign Person Employees

– Acquisition of Defense Articles product line from a Foreign Defense Manufacturer



P ibl S i• Possible Scenarios:– US Company acquiring product line from another US

CompanyCompany

– US Company acquiring wholly-owned US subsidiary of Foreign Company



C id ti• Considerations:– Request confirmation for ITAR registration for previous 5

yearsyears

– Have ITAR exports been made to China or any ITAR 126.1 destinations – mandatory disclosure to DDTC will be required [22 CFR 126.1(e)]

– If target is custom-builder of components, what were end h d ?uses, who were end users?



C id ti• Considerations:– Does target use foreign sales agents, i.e. brokers?

Are foreign brokers registered under ITAR Part 129?– Are foreign brokers registered under ITAR Part 129?

– Has target diligently overseen the activities of its foreign sales agents for FCPA?

– Evidence of compliance with ITAR Part 129 and Part 130



C id ti• Considerations:– Must examine target’s Product Spreadsheet showing

export control jurisdiction or classification determinations d EAR ITAR [ECCN d USML C t i ]under EAR, ITAR [ECCNs and USML Categories]

– Are there supporting DDTC CJ and BIS CCATS determinations?

– No such spreadsheet – likelihood of export and/or reexport violations is higher



C id ti• Considerations:– Is a foreign subsidiary of a US-target selling products or

services to Iran or Cuba?services to Iran or Cuba?

– If yes – was a license obtained? If not, possible OFAC violation

– Does foreign subsidiary provide products or services for Iran’s petroleum/energy sector?



C id ti• Considerations:– Do US target and/or its “controlled-in-fact” foreign

subsidiaries sell products to countries boycotting Israel?subsidiaries sell products to countries boycotting Israel?

– If so, then EAR anti-boycott compliance issues must be reviewed.

– Are there any target-filed pending voluntary disclosures with the agency?



C id ti• Considerations:– Target’s sales to foreign governments – if so:

A th hi h “ i i ” id t t i l d i h• Are there high “commissions” paid to agents involved in such sales?

• High “commissions” raise possible FCPA violations



C id ti• Considerations:– Does target employ foreign national employees? I-129

Work Visa compliance procedure?Work Visa compliance procedure?

– Valid work visa NOT substitute for export license under any circumstance, where employee works with export-controlled items or technologies

– Deemed export violations for visitors and seminar t ti ?presentations?



C id ti• Considerations:– Recordkeeping requirements complete?

– AES filings complete?

– Have there been many “routed transactions”?

– Where are the target’s export compliance training materials?



C id ti• Considerations:– Records of ongoing & recent training sessions with lists of

attendees?attendees?

– Is there TTCP and/or TCP?

Can claims of duty free import entry be validated by– Can claims of duty free import entry be validated by supporting documents?

– Can rules of origin claimed under FTA be demonstrablyCan rules of origin claimed under FTA be demonstrably established?


Sales / Purchase TermsSales / Purchase Terms

R l t A i NOT t t l t• Regulatory Agency is NOT a party to sales agreement

• Purchase Agreement terms cannot stop Agency from• Purchase Agreement terms cannot stop Agency from imposing Successor Liability for penalty and/or sanctions against buyer for the seller’s export or import violations committed before sale.


Sale / Purchase TermsSale / Purchase Terms

• Terms can provide for• Terms can provide for Escrow held by a third party

• Sum withheld from sales price for a sufficient period of ptime to offset the costs associated with potential penaltiespotential penalties and violations



B i t t t fil V l t Di l ith• Buyer can require target to file Voluntary Disclosure with relevant Agency for violations before closing sale

• Buyer can make closing terms contingent upon outcome of Agency action on Disclosure



C i i d ifi ti f “d ”• Can require indemnification for money “damages” caused by imposition of penalties by agency

• Can allow cancellation of MAD transaction based on Due Diligence results


Questions?Questions?


Contact InformationContact Information

Margaret Gatti EsqMargaret Gatti, Esq.215-963-5569202-739-5409

[email protected]

Louis K Rothberg, Esq.g, q202-739-5281

[email protected]


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Documents

Successor Liability in Export and ItT tiImport Transactions · I&E LImport & Export Law • Whee successo ta es on successor takes on burdens of a previous unrelated entity through